Article / 18 November 2015 at 2:00 GMT

Earnings review: revenue down but focus is on forecast

China Watcher / Shanghai
  • revenues and earnings miss consensus for first time since IPO in 2014
  • Share price closes up 7.7% on higher-than-expected revenue forecast 
  • Closure of platform should come as no surprise
  • GMV ratio of Alibaba to has closed as grows more popular 

By Neil Flynn

China’s second-largest online retailer,, reported its earnings on Monday morning, with revenues and earnings missing analysts’ consensus for the first time since its IPO in 2014. Nevertheless, the share price closed the day up 7.7% as analysts were impressed by the higher-than-expected revenue forecast for the fourth quarter. Here are the four key points from the earnings release and conference call:

 Consumers tend to delay purchases in the third quarter to wait for discounts in fourth-quarter shopping events such as Single’s Day. Photo: iStock

Headline Results

Revenues of RMB44.1bn were below the consensus of RMB44.3bn, but more importantly declined sequentially for the first time. The quarterly revenue decline was 4%, which was always likely given that the third quarter typically sees the lowest revenue growth in the industry. Consumers tend to delay purchases in the third quarter in order to wait for the large discounts in the fourth-quarter shopping events, such as Single’s Day and 12.12. 

Non-GAAP EPS of RMB0.02 also missed consensus of RMB0.09. However, this won’t attract much focus as management has always maintained that it is currently targeting platform and revenue growth, as opposed to profit growth. revenues
Source: Investor Relations

Paipai To Be Closed Down

The closure of the C2C platform at the end of the year should come as no surprise to investors as it hasn’t gained the traction that the firm was hoping for. In reality, it was likely never going to, simply because the C2C market is dominated by the Alibaba platform Taobao. 

Just to explain, ecommerce is typically split into two types of platforms. B2C is where large brand names sell their products directly to Chinese customers. C2C is where small and independent merchants sell their products, and hence there is a higher risk of counterfeit products. The difference can be thought of as Amazon (B2C) and eBay (C2C). 

The reason that management gave for the decision was that it is difficult to control the number of counterfeit products on the platform. Whilst this may be true, it is nothing more than a subtle criticism of its biggest rival, Alibaba, which is continually dogged by counterfeit goods claims on its Taobao platform, and something that uses in marketing strategies; its Single’s Day commercials used the theme ‘why buy cheap when you can buy authentic?’ 

In regards to the affect on GMV, it will be minimal, as third-quarter GMV from Paipai was just RMB4bn, compared with total GMV of RMB115bn. However, I believe that the closure of Paipai actually raises an interesting point: as Chinese consumer tastes develop, will C2C platforms begin to lose their relevance? 

If we take Alibaba’s Taobao as a bellwether for the industry, given that its market share is in excess of 80%, sales growth has slowed considerably, particularly when compared with its B2C site, Tmall. As of the third quarter, sales on Tmall grew 56.25% year on year whilst Taobao sales just grew 15.36%. 

A point that I have made over the course of the year is that Chinese online retailers are focusing on the cross-border ecommerce business, which is where consumers get direct access to authentic imported goods direct from the manufacturer. We are seeing a structural shift away from the cheap (and likely fake) branded goods found on C2C platforms towards a greater demand for authentic products, which can only really be found on B2C platforms. 

Paipai was never going to challenge Taobao, but the low GMV figures suggest that it’s simply a business not worth entering. Whether this is because Taobao has such a dominant position in the market, or whether the future industry growth potential is low, remains to be seen. At the moment, I am mostly favouring the former, but should Taobao continue to post slow GMV growth in forthcoming quarters, it may be worth revisiting the latter in more detail. 

Strong Fourth Quarter Guidance

Investors largely ignored the failure to meet revenue and earnings consensus as the firm announced fourth-quarter revenue forecasts that exceeded expectations. The range of RMB51bn to RMB52.5bn was higher than the expected RMB50.6bn, but in reality this shouldn’t be a surprise to investors. The midpoint of the forecasted range would only suggest a 17.3% quarterly revenue growth, which is more than achievable, particularly given that the fourth quarter tends to see the largest GMV in the industry.  

Despite the strong revenue forecast for the fourth quarter, earnings from its biggest rival, Alibaba, will likely foreshadow’s earnings. After posting disappointing revenues and earnings this quarter, the strong forecast now puts a lot of pressure on management to achieve this target. 

Growing GMV Deficit To Alibaba

As is Alibaba’s closest ecommerce rival, there is value is tracking the progress of closing the GMV ratio between the two firms. Given that Alibaba is a larger firm, its GMV was 6.2 times the size of’s in the third quarter, although this ratio has fallen as has become more popular. 

Alibaba JD GMV Ratio
Source: and Alibaba Investor Relations. Create your own charts with SaxoTrader; click here to learn more.  

There is a quite notable pattern that emerges when tracking GMV changes between Alibaba and First, performs particularly well in the second quarter, as it has its own anniversary sales event. Therefore the ratio between Alibaba GMV and GMV declines. 

Second, the fourth quarter contains Single's Day and the (less important but still popular) 12.12 shopping festivals, which Alibaba dominates. As highlighted in the chart, the fourth quarter always sees a spike in the GMV ratio. Although doesn’t report Single's Day sales figures as they would appear very small compared with its larger rival, Alibaba is the dominant player in the Single’s Day event. So much so that it is seen as an Alibaba event, with rival firms tagging along. 

Not only did Alibaba convert it from a student party into a huge sales event, but the firm broadcasts its sales results in real time, and Jack Ma hosts a TV show on the evening of the 10th November, with a New Year’s style countdown as the clock strikes midnight. 

As Alibaba has already announced its Single’s Day sales record, investors should expect the GMV ratio between the two firms to widen in the fourth quarter. The better-than-expected revenue forecast from may have given investors something to cheer, but the firm may find it difficult to outshine its larger rival in the fourth quarter.

– Edited by Susan McDonald

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.


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